A new way out west?
Even as the town of LacMégantic is still reeling after the fatal disaster involving oil- laden trains, there are few signs the crude- by- rail expansion will start to slow.
In fact, rail is finding new pockets of opportunities and might even facilitate the transfer of Canadian crude to Asian markets — if regulations allow.
Nearly a dozen plans to accelerate oil shipments via rail to the Northwest United States are focused on sourcing North Dakota and Alberta oil shipments to a string of refineries dotted along or near the U. S. western coastline, according to a report by Seattlebased Sightline Institute.
“In Oregon and Washington, 11 refineries and port terminals are planning, building, or already operating oil- by- rail shipments,” Eric de Place, an analyst with Sightline Institute, said in an interview. “The projects are designed to transport fuel from the Bakken oil formation in North Dakota, but the infrastructure could also be used to export Canadian tar sands oil.”
The combined oil- by- rail projects could add up to 720,000 barrels per day — that’s more oil capacity than Enbridge Inc.’ s Northern Gateway pipeline or Kinder Morgan Inc.’ s Trans Mountain expansion, both of which are proposing the West Coast access for Alberta crude.
While Washington refiners typically focus on light Bakken fuel, recently there has been a concerted effort to secure more Canadian blends, including tight oil and oil sands.
“Yes, it is something you are starting to see already,” Harold York, an analyst at energy consultant Wood Mackenzie, said. “Pipelines are built up. The crude is just so attractively priced in Edmonton, as a result, Washington refiners have developed their rail capacity to get more of that inland- discounted crude to their refineries.”
Last year, Washington refineries received 241,000 bpd of imported fuel of which 60% came from Canada, according to the Canadian Association of Petroleum Producers, which sees Washington’s refinery cluster as a promising destination for Canadian crude.
“Refineries in Washington and California need to replace their traditional sources of supply that are now declining and may represent a future market opportunity for Canadian producers,” said CAPP in its annual report published in June.
Of the cluster of refineries around Washington’s Puget Sound lowland areas, two receive oil- by- rail shipments, and the remaining three are planning new facilities.
“Three proposals for Grays Harbor would move oil along the Washington coast. And on the Columbia River, one port terminal is already receiving oil- by- rail shipments, while officials at Vancouver are planning by far the region’s largest facility,” Mr. de Place said.
In April, Tesoro Corp. and Savage Co. formed a joint venture to develop and operate a new 120,000 bpd crude- by- rail unloading and marine loading facility at the Port of Vancouver, Wash., for an investment of approximately US$ 100- million.
While the companies have publicly stated capacity of 120,00 bpd, their official submission to City of Vancouver’s Land Use Planning department shows a plan for 360,000 bpd.
With access to rail and existing marine infrastructure, the Port of Vancouver is ideally positioned to serve as a hub for the distribution of North American crude oil to West Coast refining centres, the companies said.
“We can confirm this project is designed to facilitate the transportation of domestically produced North American crude oils to West Coast refineries,” said a Tesoro spokesperson, declining to provide further details.
BP, which operates the largest refinery in the Northwest, is planning a US$ 65- million facility to receive rail cars and accept 20,000 bpd by the end of 2014. The refinery already receives Canadian crude.
However, BP says its project is focused on growing supplies of U. S. crude and refining it for domestic fuel markets.
Royal Dutch Shell PLC has talked about a rail loop at its Puget Sound refinery but has not filed for a permit yet.
Phillips 66 Co.’ s Ferndale refinery also accepts Canadian oil sands product and is building a rail car receiving facility to handle 30,000 bpd by the end of 2014.
The company signed a fiveyear deal with Targa Resources Partners to transport “advantaged U. S. or Canadian crude oil” from railcars at Targa’s Tacoma terminal onto barges for delivery to the Phillips 66 Ferndale, Wash., refinery.
“The facility also allows for delivery into the San Francisco refinery, where crude imported from outside of North America could be replaced.”
The California connection is significant, as analysts believe the Golden State’s heavy- oil receiving refineries are a bigger market for Canadian crude.
“Outside of the U. S. Gulf Coast, the greatest opportunity for oil sands is the Canadian West Coast,” said IHS CERA in a report published this year. “This would open up markets in California and Asia, including China. Although California has significant potential to consume greater quantities of oil sands crude today, Asia is more about future potential.”
With so many western refineries gearing up to receive rail shipments from Alberta, the American West Coast could conceivably emerge as a conduit for Canadian crude to be shipped to Asia.
“The primary barriers may be economic, not regulatory,” Mr. de Place said, arguing that railroad shipping costs may be a hindrance to exports.
“That said, there are no obvious regulatory or logistical hurdles to doing it. The ban on crude oil exports applies only to U. S. crude, not Canadian product, so Alberta oil could be exported now with no real impediment.”
Not everybody agrees the regulations are so clear.
“There might be a regulatory wrinkle,” Mr. York said. “You will hear international trade lawyers argue both ways ... We will have to wait and see.”
Analysts expect to see more refineries building railcar receiving and unloading facilities, especially across the Western U. S. to facilitate Canadian oil sands shipment.
All of this is feeding into the oilviarail phenomenon. Rail Theory Forecasts LLC, which tracks train orders, has revised estimates for new oil tank cars on order from 48,206 at the start of the year, to around 61,300 tankers by the end of the first quarter, with approximately 20,000 catering to the Canadian oil industry.
Cenovus Energy Inc., which believes oil by rail is here to stay, is planning to raise shipment by railway to 30,000 bpd from 5,000 bpd by 2014, according to RBC Dominion Securities.
Suncor Energy Inc. has 60,000 bpd of rail capacity moving thirdparty crude, and plans to move more of its equity crude, of up to 30,000 bpd over time, while Canadian Natural Resources is shipping up to 15,000 bpd.
New crude- by- rail arrangements may make communities living near railroads uneasy in light of the Lac- Mégantic accident. Companies will have to pay special attention to community sensitivity lest they suffer the backlash experienced by their pipeline counterparts.
“At this point, the public is barely aware that oil by rail exists in the Northwest,” said Mr. de Place. “My hunch is that, as the issue becomes more prominent and better understood, it will be seen as a bit of both: a domestic supply of inexpensive crude oil but also an endeavour that raises real questions about environmental and public health risks.”